Digital assets at the crossroads
As policymakers wrestle with the regulatory framework, crypto enthusiasts fear that an opportunity is slipping from Thailand’s grasp, write Nuntawun Polkuamdee and Suchit Leesa-nguansuk
With the recent unveiling of the digital asset decree as an overarching apparatus to regulate digital asset investments and transactions, opinions are divided on whether the framework will help domestic digital fund-raising leap forward or retreat backward into oblivion.
Like many countries around the globe, Thailand saw a virtual gold rush in 2017 as the price of bitcoin skyrocketed more than 400%. The phenomenon enticed amateur investors to place bets on the cryptocurrency and buy massive amounts of graphics processing units at tech expos.
But fears of money laundering, tax avoidance and scams linger in the minds of conservative Thai authorities, prompting the decision to put in place stringent regulations to safeguard investors and the country’s financial stability.
After several rounds of public hearings, a royal decree regulating digital assets took effect on May 14. The 100-section law defines cryptocurrencies as digital assets and digital tokens.
All market participants, including initial coin offering (ICO) issuers, digital exchanges, brokers and dealers involved with digital asset transactions, are required to register with the Securities and Exchange Commission (SEC) within 90 days of the effective date. They must also receive the Finance Ministry’s approval to conduct digital asset business.
Digital asset transactions will be subject to a 15% withholding tax on capital gains if there is a profit.
Sellers of unauthorised digital tokens will be fined no more than twice the value of the digital transaction or at least 500,000 baht. They could also face a jail term of up to two years.
“I believe that with the [withholding tax] on capital gains of 15% implemented, this will either force the crypto-fiat currency transactions to go underground, or it will expedite the process of fully crypto-crypto transactions,” said blockchain expert Jirayut Srupsrisopa. “Also, with the Inthanon project of the Bank of Thailand coming out, Thai society will go completely cashless in the future.”
The central bank has a proof of concept to use blockchain for Inthanon, a wholesale digital currency project. The scheme is expected to improve the Bank of Thailand’s management of interbank baht settlement in the banking industry, keeping it in line with the direction of counterparts around the world.
FLEEING OVERSEAS
Taxing capital gains derived from digital asset Mr Jirayut says some transactions could be forced to go underground.
transactions is one of the initiatives designed, in the view of financial authorities, to clarify tax duties imposed on individual investors and firms involved with the virtual trade.
According to the amended Revenue Code, individuals who gain and receive benefits from putting money into digital assets are subject to a 15% withholding tax.
But the Finance Ministry will waive the 7% VAT for retail investors who trade cryptocurrencies and digital tokens through digital exchanges, Mr Saroch said, adding that the waiver is intended to alleviate the tax invoice burden for individuals.
The VAT waiver will be subject to cabinet approval.
Juristic persons and individuals are also required to include capital gains and benefits from digital asset transactions in computing income tax.
Saroch Thongpracum, director of the bureau of legal affairs at the Revenue Department, said the withholding tax against individuals is not aimed at increasing the tax burden, but the levy could shed some light on the income category.
Commenting on those who live in Thailand but trade digital assets abroad, Mr Saroch said it’s the duty of taxpayers to declare such income, otherwise they will face both civil and criminal penalties if the Revenue Department discovers the transactions.
The Finance Ministry will also issue ministerial regulations to impose a 15% withholding tax on capital gains and benefits from digital asset transactions for corporate entities, Mr Saroch said.
Firms that make digital-asset-related trades will be liable for a 7% value-added tax (VAT) payment from the transaction value, on top of the 15% withholding tax, he said.
Hefty taxes seem to be congruent with Japan’s regulation to make investors investing in digital assets pay the price for their trades.
Japan’s National Tax Agency has imposed a levy on profits from virtual money running from 15% to 55%. The top amount applies to people with annual earnings of ¥40 million (11.6 million baht).
Similarly, the US’s Internal Revenue Service in 2014 declared cryptocurrencies to be property, like gold or real estate, making long-term capital gains on them subject to tax, though at rates lower than Japan’s.
But some people involved with the cryptocurrency industry have voiced disagreements with such tax liabilities, saying the move is discouraging to investors and will prompt them to ply their trades in overseas markets instead.
With no capital gains tax on long-term investments in virtual money in some jurisdictions, including Singapore, a handful of cryptocurrencyrich investors have already left Japan, said Kengo Maekawa, chief executive of Shiodome Partners Tax Corp.
Mr Jirayut is also among those disagreeing with Thailand’s tax measures on digital asset transactions, saying such a tax imposed on individual investors will increase financial burdens among traders, who may move to trade via online foreign exchanges and park their money in overseas bank accounts for a certain period before transferring their earnings to Thailand.
“I understand that the Revenue Department has a duty to maximise tax, but the department does not understand that these protocols [such as the blockchain technology and digital currencies] are aimed at cutting payment transaction cost,” he said. “Finally, we will get nothing from these technologies that have an objective to help cut costs.”
Tax measures will protect people only for the short term, he said, and the long-term right approach is to educate people about cryptocurrencies in order to prevent them falling into a Ponzi scheme.
But Thuntee Sukchotrat, chief executive of a local digital asset exchange called JIBEX, said investors should not be overly concerned, due to how profits made from trading will be calculated with their annual income, and therefore they may be refunded
if their annual income is lower than their tax bracket.
“Content in the digital asset decree is better than expected, but we have to wait for further details from the authorities,” Mr Thuntee said. “Overall, the new law is in line with that of other countries and it also focuses on investor protection and anti-money-laundering measures, which are acceptable.”
FUNDING BARRIER
Raising funds through ICOs is an ideal method for startups with potential business models but without sufficient capital injection. As the digital asset decree takes effect, however, the prospects of ICO fund-raising projects in Thailand seem disheartening.
New ICOs will be prohibited from launching during the public hearing process to draft an organic law on regulating digital assets, the
SEC said.
Such organic l aw is expected to be unveiled in the middle of June, according to SEC secretary-general Rapee Sucharitakul.
The public hearing process started on May 16 and runs until May 30.
Once the process is completed, surveyed opinions will be considered by the SEC and the regulator will begin drafting an organic law to specify business qualifications, fund-raising framework and qualifications of different types of investors investing in digital assets.
ICO transactions are similar to crowdfunding, whereby an issuer presents a business model to investors. The difference is that the raised funds are in the form of digital currencies using blockchain, and the deals are enforced using smart contracts.
Among the most important points issued by the SEC is the retail investment amount in an ICO offering. Retail i nvestors’ i nvestment amount is capped at 300,000 baht per ICO project.
The maximum investment value per project is stipulated at no more than four times the shareholders’ equity of an ICO issuer and no more than 70% of the total value offered.
The SEC has the authority to prohibit any ICO offering deemed lacking in integrity, transparency or compliance.
For digital asset exchanges, they are required to be entities established in Thailand and must maintain a minimum shareholders’ equity of 50 million baht at all times.
These exchanges are required to pay a 2.5-million-baht operating licence fee for a cryptocurrency exchange and a 2.5-million-baht operating licence fee for a digital token exchange.
The annual fee is capped at 0.002% of trading value, or a minimum of 500,000 baht a year and no more than 20 million baht a year.
More importantly, ICO issuers are liable for the 7% VAT when they sell digital coins to investors, and they must recognise the proceeds arising from the ICO offerings as income.
Sathapon Patanakuha, chief executive of SmartContract Thailand, said the government’s 15% withholding tax on capital gains and tax imposed on ICO offerings are barriers threatening the startup fund-raising process through ICOs.
The law has a mandate for companies raising funds via ICOs to complete the process within one year and are subject to tax liability, Mr Sathapon said.
“A few foreign projects planning to raise funds via ICOs [in Thailand] have already been postponed due to the new regulation,” he said.
“For ICO issuers which are currently raising funds in the domestic market, they have to be regulated under the new law, but for those raising funds in the global markets, they can continue the process,” said SEC technology adviser Bhume Bhumiratana.
Year-to-date funds raised from global ICOs are valued at US$1.88 billion, according to the ICO Watch List website.
According to other sources who are familiar with the digital coin mining community, at least 500 million baht worth of coin mining business might move out of Thailand into foreign countries because of the regulatory framework’s unfriendly nature.
“Cryptocurrency is freedom of an economy,” said Roger Keith Ver, an investor in bitcoin-related startups. “If you control it, this would threaten the future of an economy.”
REGRESSIVE DIGITAL ECONOMY?
With no multilateral agreement in place on regulating and taxing digital asset investments and transactions, it remains doubtful whether the recently introduced digital asset decree is supporting Thailand’s digital economy initiative going forward.
The initial draft was clearly thrown together in haste, and the undue tax burden could slow Thailand’s competitiveness as it moves towards the digital economy, said Rachanee Prasongprasit and Piphob Veraphong of LawAlliance Ltd.
The government really needs to carefully review its policy and differentiate between the taxation of cryptocurrency mining and digital token transactions in order to design a tax system that fits with the Thailand 4.0 strategy, they said.
Makkhawan Voraboot, co-founder of the Bitwalex digital exchange, said digital asset exchanges and cryptocurrency e-wallet service providers agree with the new digital asset decree, but the 90-day grace period for market participants’ registration is quite short in their view.
“In my opinion, it should take longer than a year and the law should be flexible due to constant changes in technology,” Mr Makkhawan said.
There are also voices asking for Thai authorities to consider establishing a national digital asset exchange to help propel the digital trade.
“If the government has the legal authority to curb digital fund-raising, they should have an organisation to help trading — whether the country has an official digital exchange with high standards like the Stock Exchange of Thailand or Market for Alternative Investment or not,” said J Ventures chief executive Thanawat Lertwattanarak.
J Ventures is a subsidiary of SET-listed Jay Mart Plc and the issuer of JFin coin.
In the US, bitcoin futures kicked off on two of the world’s major derivatives exchanges, the Chicago Board Options Exchange and the Chicago Mercantile Exchange, in mid-December 2017.
But any move for domestic banks to get themselves involved with the lucrative virtual trade is out of the question, as it is prohibited by the Bank of Thailand. Daranee Saeju, senior director of the financial institutions strategy department at the Bank of Thailand, said the central bank will still maintain its requirement barring all financial institutions from making or being involved in cryptocurrency transactions despite a law governing digital assets coming into force.
The central bank will continue monitoring cryptocurrency transactions to protect consumers from high-risk financial products and money laundering, Ms Daranee said.
The central bank in February sought cooperation from financial institutions to avoid investing or trading in digital tokens to benefit themselves or customers, refrain from providing exchange channels for customers trading in cryptocurrencies, and refrain from creating platforms for customers to make cryptocurrency transactions.
Financial institutions were also asked to prohibit customers from using credit cards to trade cryptocurrency and avoid giving advice to clients investing in digital tokens.